Action Bias leading to Lower returns

1.  Seen people pressing elevator button despite having already pressed?
2. Noticed people honking their horns repeatedly when the traffic signal is still red?
3. Come across people who keep tapping their screens when phone takes long to respond?

We tend to do things despite knowing that they might not make a difference to the situation.

Action Bias makes us feel good to be in control, we equate action = progress 

Doing nothing makes us feel miserable and lazy, leading to Action

The biggest challenge for long-term investing is urge to control action during volatile times

We risk of missing out on few best days and Significant returns come in those few days

If you did not do anything you would have got annualised return of 14% as per below chart

the original article appeared here

No Need to Panic during market corrections

 Consider Practical and actionable aspects during corrections to take advantage

Most of us as investors know that Volatility and corrections are part of the market

However when the real correction happens, we not only forget this wisdom and but also get nervous & panic. In that state of mind we worry about unknown and loose focus on the useful and profitable aspects. Every market correction was followed by a recovery.

Corrections are normal

we have seen 6 times Nifty correct by 15% or more over past 15 years

Highest was 60% Jan to October 2008

Lowest correction was 15% Aug to October 2018

Longest Correction was Nov 2010 to Dec 2011

Shortest correction was Feb to March 2020

This is known only in hindsight but unfortuanately most investors try to predict the duration of the correction or the depth, this often leads to frustration and anxiety as no once can predict these events. Instead it will be useful to take advantage by focusing on investing more at these times as corrections will end and markets will bounce.

The Real Drama is not in the index

In 2021 while Nifty500 was up 30.2%,  average return of the top 25 stocks was 244%

average return of the bottom 25 stocks was -33%

in 2018 Nifty500 was down 3.4% (-), average return of top 25 stocks was +49%

average return of the bottom 25 stocks was -68%

after the correction phase, the returns in the next 12 months of the index tend to be very healthy.

Do no get perturbed, it is impossible to predict the duration and extent of the correction. It is best to use systematic approach to investing , continue your SIP and increase allocation to equity.

This is brief summary of an article written by Harshad Patwardhan for ET Wealth October 3-9, 2022

Why is my mutual fund not in the best performing category?

 Who does not want to invest in only the best performing funds?

That’s why all portfolios look the same, we look at historical data and invest based on what is glorified in the media.

As a result, all our portfolios will carry the top performers of the recent past or some legacy funds which would have topped during a previous era.

 Most investors choose funds by looking at the top 5 funds based on past 3 years return. This could be distorted due to a one-off great year, or a big risk that worked for the fund (but could have failed).

The top performing funds are based on past performance. We can no way assume their performance would continue into the future.

 So how do you choose a fund?

1.      Check if the fund performance has been in the 1^st 2 quartile, meaning in the first 50% in 7 out of past 10 years.
2.    Avoid flash in the pan performance funds
3.    No matter how hard you try, your fund is not going to remain in the toppers list year after year (see chart above)
4.    A fund manager may take a view in a certain market condition, there are chances he can go wrong even with the best experience.
5.     There can be times when a fund managers decision takes time to work, during which the fund may temporarily underperform and then start doing well.
6.    When the call works right, the fund will be rewarded with top performance, but if you had hoped to another top fund during the underperformance, you would miss on the rally in both the funds
7.   Top performing funds will lose its charm soon enough and can underperform in the next cycle. Remember markets are cyclical and no one stays at the top.

That’s why it is said the quest for the best performing fund is futile.

Instead follow a disciplined process and rebalance periodically.

If you see the data above, no best performing fund has remained on top the very next year

Systematically we can not predict who will be next winner, even if we get it right, it is just fluke and it will again change next qtr

Transforming - to +

 

An investor has seen -14% and +20% also, if he stayed invested he would converted - to + 

Making money is very simple, it needs discipline of staying invested in market 

and staying away from distraction of market

Continue your SIP specially when past returns are low as this will lead to + results in future

Why Asset Allocation & why Rebalance ?

The most imporant key to successful investing is asset allocation

As you can see from the chart below, winners keep changing and no one can predict which asset class will do well in the future, so be invested in all the asset class and rebalance regularly

Rebalance by moving funds from assets that have performed very well to those that have under performed